Agency Problem Essay 9
Financial Management
(Agency problem)
Prepared by: Sami Hassan Saeed Singabi
August 2008
Introduction
Economic science teaches us that due to their subjective needs, individuals have subjective preferences, and hence different interest. Occasionally different subjective interests give rise to conflicts of interest between contracting partners. These conflicts of interest may result in turn, in one or both parties undertaking actions that may be against the interest of the other contracting partner. The primary reason for the divergence of objectives between managers and shareholders has been attributed to separation of ownership (shareholders) and control (management) in corporations. As a consequence, agency problems or principal-agent conflicts exist in the firm. Agency theory deals with such problem. Agency theory is concerned with how these agency problems affect the form of the contract and how they can be minimized, in particular, when contracting parties are variously informed (or uncertain).
Agency problem
A problem arising from a conflict of interest between principals such as investors and agents acting for them, such as brokers or managers. Agency problem refers to a conflict of interest arising between creditors, shareholders and management because of differing goals. It exists due to problems in corporate governance.
A typical problem is that of senior management of a company, who are charged with running the business in the interests of shareholders; choose instead to operate to maximize their own interests.
A simple example is the hired manager who fills his pockets at shareholders ' expenses. For example, an agency problem exists when management and shareholders have conflicting ideas on how the company should be run.
Agency problems that arise in a corporation have troubled economists for some time. There are a number of mechanisms that have been used to try and reduce these agency problems. Many of
(Agency problem)
Prepared by: Sami Hassan Saeed Singabi
August 2008
Introduction
Economic science teaches us that due to their subjective needs, individuals have subjective preferences, and hence different interest. Occasionally different subjective interests give rise to conflicts of interest between contracting partners. These conflicts of interest may result in turn, in one or both parties undertaking actions that may be against the interest of the other contracting partner. The primary reason for the divergence of objectives between managers and shareholders has been attributed to separation of ownership (shareholders) and control (management) in corporations. As a consequence, agency problems or principal-agent conflicts exist in the firm. Agency theory deals with such problem. Agency theory is concerned with how these agency problems affect the form of the contract and how they can be minimized, in particular, when contracting parties are variously informed (or uncertain).
Agency problem
A problem arising from a conflict of interest between principals such as investors and agents acting for them, such as brokers or managers. Agency problem refers to a conflict of interest arising between creditors, shareholders and management because of differing goals. It exists due to problems in corporate governance.
A typical problem is that of senior management of a company, who are charged with running the business in the interests of shareholders; choose instead to operate to maximize their own interests.
A simple example is the hired manager who fills his pockets at shareholders ' expenses. For example, an agency problem exists when management and shareholders have conflicting ideas on how the company should be run.
Agency problems that arise in a corporation have troubled economists for some time. There are a number of mechanisms that have been used to try and reduce these agency problems. Many of
References: 1. Wikipedia, the free encyclopedia.htm 2. www.referenceforbusiness.com 3. Financial-dictionary. The free dictionary. com